Beware of risks in investing in sizzling oil and gas

Updated: Monday February 24, 2014 MYT 6:36:48 AM

Beware of risks in investing in sizzling oil and gas

BY RISEN JAYASEELAN

THE oil and gas (O&G) space is sizzling and there’s no sign of it cooling off any time soon. There are deals aplenty being made. Just this week StarBiz reported that exploration giant Murphy Oil was looking at hiving off stakes in its assets in the country at a whopping price of some US$2bil to US$3bil (RM6.62bil to RM9.93bil).

Any local listed company buying these assets would see itself being transformed into a major O&G producer, overnight. The question of course, is whether one can afford such a price tag and whether the returns from that investment will be worth it. Also, the proposed sale by Murphy Oil doesn’t seem to include any management control over those assets.

Another notable development StarBiz highlighted was Petronas being close to selling 10% in Canadian shale gas concern Progress Energy at a valuation of twice what the national O&G company paid back in 2012.

This is significant because Petronas came under flak for presumably paying too much to buy Progress Energy then. But now it’s sitting pretty on an asset whose value keeps rising.

Then, there was the exciting development at Scomi Energy Bhd two Fridays ago, when savvy investors Tan Sri Quek Leng Chan and his associate Paul Poh, swooped in to get a block of shares at a seemingly mouth-watering discount.

By Monday, the buyers of this block of 11.5% of Scomi Energy – that included Norway’s oil fund, Norges and Lembaga Tabung Haji – were sitting on a 42% paper gain.

Scomi Energy and another O&G company, Uzma Bhd, whose shares have enjoyed a spectacular 67% rise over the last six months – are said to be bidding and close to securing risk service contracts from Petronas.

Late last year saw another exciting O&G play enter the market: Barakah Offshore Petroleum Bhd, which is 166% up from its reverse takeover price of 65 sen.

Barakah made such an impact that dealers now talk of finding the “next Barakah” in the form of listed companies hoping to see an O&G asset injection.

Investors are also chasing a number of other O&G companies.

But making money from the O&G business isn’t easy. Our market has seen its fair share of O&G companies that had stumbled in the past.

As examples, consider the stories of Ramunia Holdings Bhd, KNM Group BhdMalaysia Marine, Heavy Engineering Holdings Bhd (MMHE) and the Scomi group. These stocks were at one point the darling of investors.

But at some point, they struggled to execute their businesses well. O&G fabricator Ramunia had slipped into PN17 status in June 2010. To quote from a Maybankresearch report dated April 2010: “Ramunia is in bad shape operationally and financially. It faces declining order book, earnings and shareholders funds due to poor project execution and negative cash flows.”

KNM Group Bhd was another high-flying oil and gas player. But it too did stumble, suffering a quarterly loss in 2009 and a full year loss at group level in 2011. Among the reasons for its losses was its high fixed cost and debt levels. It’s aggressive overseas expansion also saw it having to provide for foreseeable losses in Brazil, Canada and Indonesia.

The Scomi group had encountered similar problems with its overseas assets while giant fabricator MMHE had suffered from higher-than-expected expenses incurred from some of its projects and from the share of losses from jointly controlled entities’ performance.

One problem is that the O&G business, like many other sectors, is cyclical. You may invest during peak times but then get saddled with high fixed costs and low utilisation rates when the cycle hits a downturn.

Getting the right expertise to executive projects profitably is another challenge.

Investors shouldn’t get carried away with companies saying they are going to morph into an O&G concern. Such things don’t necessarily happen overnight. In the case of Barakah, it took the company two years to finalise its reverse takeover.

And if you are talking about the exploration and production segment, then remember that the oil majors took many years to get to where they are today.

The golden rule of looking for companies whose management have the right expertise and track record shouldn’t be forgotten in these bullish days of the O&G sector.

Senior news editor Risen Jayaseelan is betting that the O&G space will continue to sizzle in the weeks and months to come, with deals taking place left, right and centre and thereby offering opportunities aplenty for astute and well-informed investors.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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